No storm in decade, yet insurance issues swirl
Published in the Orlando Sentinel on December 31, 2015
Florida has had a lot of time to get ready. It has been an unprecedented 10 years since the last major hurricane hit the state, but that is no reason for citizens, regulators and policymakers to become complacent.
To put that streak in perspective, consider that from August 2004 to October 2005, six major hurricanes hit Florida — all but one was a category 3 or higher. In 2016, we could have another good year or a very bad one. The key is preparation, and so far Florida has made progress, but more work is still needed.
For one, policymakers and regulators have been making smart decisions to spread Florida's risk off the backs of the taxpayers. In January 2012, Citizens Property Insurance Corp., the state-run insurer of last resort, insured nearly 1.5 million policyholders with a total exposure of more than $500 billion. That represented an enormous concentration of risk in the state by one entity.
However, as of this past November, the number of policies in force had dropped to 500,000 and $150 billion total exposure. This represents a dramatic turnaround in diversification as private companies are now taking on much of that risk. This downsizing needs to continue into 2016.
In addition, during 2015, Florida leaders provided what amounted to a "tax cut" by ending costly hurricane assessments that drained nearly $6 billion over the past decade from Floridians' wallets. In the absence of hurricanes, Citizens has been able to protect taxpayers in the near term from future assessments. It is critically important that Citizens builds back its reserves before the next storm and prices its policies closer to risk, or else we run the risk of reverting to an environment that exposes inland homeowners and businesses again to paying hurricane taxes.
Going forward, we need to make sure that Citizens, as well as all insurers, have adequate capital on hand to pay policyholders in the event of a storm.
In another positive step for the year, the Florida Cabinet authorized the Florida Hurricane Catastrophe Fund (Cat Fund) to purchase reinsurance, which is essentially insurance for insurance companies that helps those companies pay out claims after a storm. It is designed to stabilize the market, spread the risk away from Floridians and transfer that risk to the global private market.
Reinsurance is a good value for what it provides, and it avoids creating more post-storm debt.
Going forward, the Cat Fund should expand its reinsurance purchases to further protect consumers from future hurricane taxes.
Without a hurricane in 10 years, you would think that insurance rates would stop rising, but insurance fraud is driving up costs. According to Citizens, in Miami-Dade, 56 cents of a premium dollar goes to pay for water-damage claims, while only 2.6 cents goes toward hurricane reserves. This is because of a legal system designed to make insurance companies pay damages more promptly — referred to as assignment of benefits — which is currently being misused by many contractors who inflate costs and attorneys who sue and collect fees when insurers question overinflated contractor claims.
In fact, the number of AOB lawsuits involving residential properties has skyrocketed from 70 in 2009 to more than 2,000 in 2014. While the number of lawsuits has increased about 100 percent per year in recent years, real per-capita income has increased only 0.6 percent.
Contractors and attorneys are getting rich, and Floridians are paying for it. Authorities need to fix the "sue and settle" system, fight fraud and educate home and business owners on how best to react if they need repairs.
All in all, 2015 was not a bad year. After a decade of calm, 2016 shows promise for continued improvement. However, let's not get too comfortable believing the Sunshine State will always avoid the swirling winds, deluge of rain and major damage that comes with an active hurricane season.
It's all about increasing preparation, reducing fraud and keeping Florida moving in the right direction. For the benefit of consumers, now it's time for Florida's policymakers to finish the job.